ENG-1993 — Page 97

FINANCIAL AND MONETARY AFFAIRS

implementation of some of the major recommendations made by the Securities Review Committee in May 1988.

The ordinance transfers to the SFC the functions of the former Securities Commission, the Commodities Trading Commission and the Office of the Commissioner for Securities and Commodities Trading. It provides a general regulatory framework for the securities and futures industries, leaving certain elements to be covered by regulations, administrative procedures and guidelines developed by the commission.

The SFC was established as an autonomous statutory body outside the civil service. It has 10 directors (half of them executive), who are appointed by the Governor. Each year the commission must present to the Financial Secretary a report and an audited statement of its accounts, which are laid before the Legislative Council.

The commission seeks advice on policy matters from its advisory committee, whose 12 independent members are appointed by the Governor and are broadly representative of market participants and relevant professions. Decisions of the SFC relating to matters concerning the registration of persons and intervention in their business are subject to appeal to the Securities and Futures Appeals Panel.

The SFC is funded largely by the market and partly by the government, although no funding was sought from the latter in 1993. Market contribution is in the form of fees and charges for specific services and functions performed (on a cost recovery basis), plus a statutory levy on transactions recorded on the stock and futures exchanges. Its annual budget in 1993 was about $180 million. On December 31, 1993, the SFC had an establishment of 222.

In its first four years of operation, the SFC has taken steps to develop a detailed framework of securities regulation that brings Hong Kong in line with internationally- accepted standards of market regulation and practice. As part of this exercise, it has issued revised versions of the Code on Unit Trusts and Mutual Funds and the Code on Take- overs and Mergers. The revised versions bring the codes in line with the increasingly sophisticated investment environment and incorporate a number of features designed to deal with situations which are unique to Hong Kong. Two new codes (the Code on Investment-Linked Assurance and Pooled Retirement Funds and the Code on Immigration-Linked Investment Schemes) have also been issued, enhancing the level of protection for investors of these funds within the framework of the Protection of Investors Ordinance.

The SFC has been encouraging the development of more efficient equity trading systems and a greater variety of securities and futures products. It has been working closely with the stock exchange on the phased implementation of an Automatic Order Matching and Execution System (AMS) since November 1993, under which orders are entered into the screen-based trading system and executed automatically when the buy and sell prices match. The AMS enhances the trading capacity and efficiency of the stock market and enables the instant capture and dissemination of market data, which will contribute to greater market integrity and transparency.

Implementation of the AMS will facilitate the introduction of the short-selling of stocks on January 3, 1994. A sound regulatory structure has been developed to allow such short-selling through registered members of the stock exchange. Initially, 21 shares will be eligible for short-selling. These shares are the largest Hang Seng Index constituent stocks, a significant proportion of which are in the hands of the public.

73